The State of the Union

I am sure that most reading this blog were pretty bothered by the President’s State of the Union Address last night, if they watched it.

In my mind the economy has always moved based on certainty and when there is uncertainty they economy slows. Right now there is no certainty as to what the government is going to do. I would say that 80% of the speech was the “same old” stuff. A lot of political rhetoric and statements about what a great job they’ve done since taking over from the previous administration (because we all know it’s the administration that enacted all of the laws that grew the government and created the bubbles…right?). Then, of course, there was the obligatory sharing of personal stories from around the country that we know the President was involved with personally…or maybe it was a letter that a staff member read and put on his teleprompter (Does it bother anyone else that the Presidents – I do realize all of them have done this – parade these personal stories around for their own political agenda?). And then the statements of how great we are and how great we’ll be if everything said is taken care of, etc.

No, it wasn’t the same old stuff that bothered me as much (though it would be nice if everyone would give the “I inherited this problem” line a rest); it was the direct attack on the Republicans.

Now, in interest of full discloser, I haven’t been exactly thrilled with the work done by the Republicans of late either. But for the President of the United States to come right out in a combative posture towards one political party, while at the very same moment talking about the need to work in a bi-partisan way, is just downright maddening. From his snide comment while talking about freezing government spending for three years that his party would find it difficult because they would want to use that money to help people (because we all know Republicans just want to withhold money so that we can enjoy watching people suffer), to his tone and body language when he was giving both(?) parties a “talking to” about their partisan fighting of late (Did you notice how most of the time was spent looking at the Republican side of the aisle as he talked about the need to quit fighting and even when he did occasionally glance towards the Democrat side he still kept his body angled slightly to the Republicans, giving the impression that the entire talk was for them), he just seemed to ooze out his true colors as a hypocrite. I am not naïve enough to think that cases of hypocrisy are rare in politics, but usually the President is better at covering it up in his major speeches.

Then to reiterate to the Democrats that they still held the majority and therefore should press on (more attacking the Republicans too in my mind), despite what their constituencies told them showed his true colors as a politician. I have said it once and will continue saying it most likely until we can get rid of most of those currently in office: Why is it that the Democrats seem to think that the definition of bi-partisanship means that the Republicans should quit causing such a stink and just agree to what the Democrats want? It would be nice if the Democrats – and especially the President now after this attacking speech – would come to understand the true meaning of bi-partisanship. In my mind that definition would include the thoughts that even though, as the President himself stated in his speech, the very reason for two parties comes from the vastly different philosophical points of view which have existed for centuries, we should still be able to come together and in a form of compromise (that means give and take from both sides…just to clear that up) pass laws that the majority of Americans can believe in.

And, again to clear things up, that doesn’t mean that when elected they can ignore their constituencies until the next election. Just because you won, doesn’t mean that the voters agree with everything you stand for or will stand for over the course of your term, and even if they do agree now they have the right to change their mind. I have to say that I agree with the President when he said that now is the time to be more open and transparent than ever. There is a severe amount of distrust from the American people. DOESN’T HE AND THE REST OF THE POLITICIANS UNDERSTAND WHY?!!!! It is because of the exact things he did in his speech: spit out several inconsistent statements, tell outright lies, and in general pretend that they weren’t part of the problem (Let’s all keep in mind that voting records don’t lie). I still think that every speech and every proposal should include sources of where they came up with the information to base their viewpoints on. If they feel like they can't cite the source because it is from a lobbyist then maybe they should change the way they do things or quit.

All that aside there were a couple of proposals that bothered me. One of the proposals that bothered me was regarding his proposal to lower taxes on the small business owner. He seemed to push that quite hard and several in the media were talking about how great and benevolent that was. What a great idea! Except for the fact that the majority of small business owners make over $250,000 a year and they are going to be taxed up the wazoo since they dared make more than most and the government is now going to need that money to pay for their agendas (which brings up another thought: it makes sticking to the budget easier when you tax everyone like crazy to expand income doesn't it? But, of course, the Democrats are only doing that because they can't stand seeing anyone suffer unlike their Republican counterparts).

The other proposal is something that has always bothered me, and I do realize that this is an unpopular opinion, is this idea that we need to “punish” (though removal of tax shelters and I would be willing to bet the addition of taxes by the time their through) those businesses that “ship our jobs overseas.” How exactly would they delineate what it means to ship the jobs overseas? How exactly are they then going to help those American companies, which for the vast majority still employ a significant number of Americans, compete? Despite all the rhetoric and chest puffing that we do to say we only buy American we tend to buy the cheapest product without regard as to where it came from. If American companies are to compete they will have to cut costs somehow and, for now, one way to do that is to outsource some jobs. As to my question regarding how they are going to delineate, think about those companies who purchase parts from all over the world. A lot of those parts are produced here in the U.S. too, so aren’t they “shipping our jobs overseas” by not buying American? If you look at the comments from those who are angry about their jobs being taken by someone overseas, a good portion of them fit this scenario. It may sound great to some, especially when jobs are so hard to find (especially for the less educated, who’s jobs tend to be the ones outsourced), to say that we should punish those companies who take jobs away from U.S. citizens, but in practice it makes a lot less sense. Why don’t we instead focus on making American made products more competitive? Lower/eliminate the massive amounts of taxes levied on American companies. Quit the verbal trade fights that just close borders not open them wider. In other words, get the Government out of the way and let the world’s most innovative and entrepreneurial business owners and workers compete on an even playing field.

In all, if not completely obvious after reading this post, I was very disappointed with the President’s Address. I thought that while he claimed to be moving forward politically, he un-abashedly continued the backward process that has picked up pace in the last 3 years.

Just Some Current Political Thoughts

On occasion I feel really bad for President Obama. While I do disagree with him on his methods and I definitely don’t agree with him philosophically, overall, I think he truly does want to make things better. I am not with that small group that thinks President Obama is out to "get" America. I think that he feels he is doing what is right for the country.

I think that the discussion about how to reform Health Care is one of those areas that I do feel bad for the President, to an extent. Where I don’t feel bad for him, or the other Democrats, is how they have gone about trying to pass this Health Care bill. I think this quote I saw on CNBC epitomizes where they have been doing wrong:

"There is only one guarantee -- that if we don't pass something the notion of trying to put Humpty Dumpty together again is a real long shot," said Rep. Patrick Kennedy, D-R.I., son of Edward Kennedy. "It's a lot easier to pass something and fix it later."

They have been pushing so hard to just pass something, as if they didn’t really care what the bill said (honestly there is no way any of them actually did know since it was over 2,000 pages of legaleze). As long as it had something to do with health care and looked big then it should fix things right? I don't believe any of them actually spent the time to really figure out what would be best for the American people and what the American people would want.

Every time I hear anyone say, this is just what needs to pass and if we could just pass it then the American people will understand that it is in their best interest (President Obama has been quoted as saying something along these lines), I can’t help but think – Then explain it now so that we understand before passing it into law. If lack of knowledge is truly the problem then help us understand. If, after all efforts to educate us, the majority of Americans are still opposed to the plan then go back to the drawing board to work on something we would like. You are our representative, not our parent.

If passing health care reform is as critical as they have been trying to sell it as being (Personally I think it is important but not more pressing than some of the other issues we are facing), then spend the time necessary to get it right. I am 100% against the notion of “Let’s pass it now and fix it later.” How often has that worked out before?

On a different, but related note. After reading the following article, I couldn’t help but think that this is the route we are taking as a nation if we continue with the notion that the government should bail us out and ensure that no company fails.



China: Lending Restrictions and Beijing's Predicament
Stratfor Today January 20, 2010 1808 GMT

Liu Mingkang, head of the China Banking Regulatory Commission (CBRC), said in an interview Jan. 20 that several Chinese banks had been asked to restrain their lending after proving to have inadequate capital reserves. Chinese media reports claimed that new bank loans so far in January have risen to as high as 1 and 1.5 trillion yuan ($146-$220 billion) — approaching or equaling the massive hike in January 2009. As a result, several major Chinese commercial banks (whose names were not given) were given oral commands to stop new lending for the rest of the month.

While the regulators will strive to control credit flows, the broader Chinese imperative to maintain growth at any cost contradicts the ability to preserve loan quality and allocate capital efficiently.

Under the guidance of the central government, bank lending — the dominant form of financing in China — has skyrocketed in the past year to spur growth, fend off the effects of slower global trade and thereby maintain social order. Amid the loan boom, Chinese authorities have at times sought to restrain banks, fearing a massive buildup of bad loans. In February, April, July and October 2009, Beijing restrained the banks, only to see lending spike again in March, June and September 2009 — and now again in January 2010. Essentially, Beijing was caught in a cycle of speeding up and slowing down credit expansion. With each deceleration, China's loan-dependent businesses, mostly state-owned and state-controlled, cry out in pain, resulting in another acceleration to make sure they do not grind to a halt.

2010 is expected to be another year of high lending, with Beijing projecting 7.5 trillion yuan ($1 trillion) in new loans — a smaller sum than the 9.6 trillion yuan ($1.4 trillion) lent in 2009, but indicative of a glut of credit consumption. In order to achieve even a mild reduction in lending in 2010 (not to mention the roughly 28 percent reduction target), the Chinese authorities know they will have to take some serious actions to restrict the banks. Hence, the demands for banks to increase their capital bases beginning in late 2009, and the raising of reserve ratio requirements on Jan. 12, forced banks to set more cash aside that would otherwise be lent out.

The Jan. 20 demand that certain commercial banks stop lending for the rest of the month is another such move.

The problem for China is that the entire economy depends on extremely loose lending policies, and when credit slows, companies in the critical manufacturing and trade sectors get squeezed. A great many Chinese companies rely on external consumers for their profits, but while exports showed growth for the first time in December, they face the usually slow months of January and February; only when spring comes around will it really be clear whether global demand has recovered sufficiently to support China's exporters. Thus, exports are no refuge yet, and since Beijing has no intention of knocking the legs out of growth, it will continue shoving credit into the system.

I Love Technology...

So, I know this is the second post in just a few days, and very few people (of those few who actually read this blog) have probably even had the chance to read what I posted last night, but I had to post this. I consider myself pretty up to date on what's going on out there but some of the stuff in this article blew me away.

You'll have to ignore some of his typing errors, and excuse his constant sales pitch (though I did edit out some of them - especially ignore the 'get rich' spot because that is like many of the 100 excercises with just this ball) to invest in biotech, and the length isn't exactly small reading, but it is fascinating what they are doing now. Anyway, here you are:


The Coming BioTech Bubble

"So now, I'm going to give you an overview of some of the truly remarkable breakthroughs in biotech, as John Mauldin has asked me to do. First, however, I'll tell you how to live longer, get richer and feel better, as promised.

It is this: Optimal vitamin D serum blood levels, attained through sunlight or supplementation, dramatically reduce the risk of most serious diseases by an astonishing 50 to 80 percent. These diseases include osteoporosis, osteomalacia, hypertension and a range of cancers from breast and colon to deadly melanoma skin cancers.

Yes, that's right. The risk of contracting the really nasty skin cancers can be dramatically lowered by getting moderate, sensible sunshine or through vitamin D supplementation. Non-melanoma skin cancers do increase somewhat with sun exposure, especially with sun burns but they are relatively benign and are easily detected and removed.

This is not the end of the list, though. The big killers and most expensive diseases respond similarly to adequate D. I'm talking about cardiovascular disease and stroke. So do type 1 diabetes, type 2 to a lesser extent, rheumatoid arthritis, peripheral vascular disease, multiple sclerosis, dementia, autoimmune diseases and apparently even viral diseases such as H1N1 and AIDs. I emphases that some of these diseases are not "cured" by sufficient D as some bone diseases are. The risk of developing other diseases and the severity of their symptoms if you do is much lower, however, if you are not vitamin D deficient.

There is, by the way, no simple prescription in terms of sunlight exposure or vitamin D supplementation because age, skin color, body weight and even location play huge factors in your circulating blood levels, which should be at least 40 ng/ml of 25-hydroxyvitamin D. Ideally, you should consult a physician who can prescribe blood tests to see where your D levels are.
This information is not new but the odds are that you are unaware of it unless you read the New England Journal of Medicine or other scientific publications. I'll include links at the end of this article for you to investigate this matter further, including the NEJM paper I just referred to.
This new consensus regarding vitamin D must be viewed as a sign of the biotech revolution on the horizon. Just as new IT and nanotech sensing technologies have shed light on the function of vitamin D, they are leading scientists to entirely unexpected discoveries in other areas as well. More importantly, these discoveries, unlike sunshine, can be patented. You, therefore, can invest in the companies that own the IP and reap transformational profits.

Some of the contributing technologies include supercomputing, without which the human genome could not have been decoded. We now know, by the way, that the activity of about 2000 human genes is moderated by vitamin D. Supercomputing has also enabled an entire new means of biological experimentation called in silico. Simply put, in silico experimentation uses 3D computer models of organic molecules. These models, existing in virtual reality environments, can be manipulated at incredibly high speeds to quickly yield results that once would have taken decades in physical labs.

Regenerative Medicine

This is numero uno; stem cell technologies. They may not be first to market, but the technology's potential is unparalleled in history for reasons I'll explain. Other huge transformational technologies may treat and prevent currently incurable diseases before regenerative medicine matures. Stem cells, however, are unique in their ability to rejuvenate the human biology. I'm not, by the way, talking about obsolete embryonic stem cells (eSCs). Despite the political rhetoric, the scientific action has moved far beyond eSCs to several other forms of stem cells.
Unless you are reading scientific publications, however, you probably wouldn't know this. In fact, the scientific literature itself is usually outdated because leading stem cell scientists are not working in academia with its "publish or perish" pressures. The last thing that scientists in start-ups and small caps want to do is give away the inside information about their innovations. As a result, almost none of the real breakthrough news in stem cell or other cutting edge science makes it to the mainstream or financial medias. Let me prove my point with a pop quiz.

Q: How long will it be before scientists can duplicate the army of clones scenario that George Lucas portrayed in Star Wars II: Attack of the Clones. In other words, when will scientists be able to swab the inside of your mouth, take a single cell and turn it into an unlimited horde of healthy babies, each with your identical DNA?

A: If you said "several years ago," you are right. This is routine, well-established science at this point. We don't believe anybody has actually used this ability with humans yet, for obvious ethical reasons. Scientists, however, have taken adult skin cells from mice and transformed them into a new kind of stem cell called an induced pluripotent stem (iPS) cells. Those iPS cells have, in turn, been allowed to develop into healthy adult mice.

As dramatic as this ability is, it is not particularly useful outside of agriculture where the technology will be used to produce perfect livestock. The real promise of iPS cells is "potentiation" for specific medical needs. What I'm talking about is taking an iPS cell, which is fundamentally identical to an embryonic stem cell, and programming it to repair aged or damage tissues.

Potentiated iPS cells could be be grown, using your own cells, that would rejuvenate your heart muscles, one of the muscle tissues that cannot regenerate on its own. These cells could be programmed to become fresh cartilage, another cell type that doesn't regenerate, thus giving the aged and arthritis sufferers youthful pain-free joints.

We're looking at non-surgical organ replacement, one cell at a time. An injection or series of injections of these potentiated stem cells would, for example, transform an aged, damaged liver into a healthy youthful organ.

Someone suffering from severe diabetes could get off-the-shelf islet cells that produce insulin, saving their lives and allowing them to live normal lives. People who are blind due to macular degeneration could see again. You name it, these extraordinary cells will do it. In fact, they did do it. Every cell in your body, cartilage, kidney, heart, skin and bones, started out as a stem cell.
So let's have another quiz.

Q: How long will it be before the programming code for cartilage stem cells is cracked.

A: Once again, the answer is that it has already happened. Top private industry scientists have decoded the secrets of hundreds of cell types and are experimenting now with cartilage, nerve and other cell types. Human tests, probably offshore because of the FDA's snail pace, will begin if not this year, then next year. These therapies will be offered initially outside the United States. Many of us believe that, once Americans begin coming back home healed of conditions previously thought incurable, the FDA will bow to public demand. Regenerative medicine will inevitably be fast-tracked.

(Note: there will be lots of scams offering all sorts of purported stem cell therapies offshore offering "cures" for all sorts of diseases. Don't buy them or subject yourself to them. The legitimate players will surface over time, associated with real hospitals and researchers.)

There is one final aspect to the regenerative medicine picture that makes it especially attractive to long-term investors. Let me tell you a story to make this point.

Last year, I was in Canada speaking at a financial conference about emerging biotechnologies. I was privileged to share the forum with Harvard futurist, best-selling author and venture capitalist, Juan Enriquez. Enriquez is a major force in cellular engineering, working closely with the genius ex-surfer Craig Venter who cracked the human genome for a fraction of the cost and in a fraction of the time that the US government had allotted. President Clinton, in fact, issued an emergency executive order denying Venter IP rights to the genome he had decoded.
Today, Venter is applying his genetic genius to the other end of DNA complexity. He is developing the tools to reprogram the genetically simplest life: microorganisms. Venter compares DNA to computer code and scientists following his work say he will create the first artificial life form, probably this year. It will be, in fact, a designer bacteria. More importantly, his next step is engineer algae that secrete high-grade hydrocarbons that can be refined into transportation fuels. ExxonMobil believes him and gave Venter's research firm $300 million to work on the project.

Anyway, I asked Venter's associate, the venture capitalist Enriquez, why his biotech funds weren't invested in stem cells. His answer was straightforward. He said that the IP was already tied up. This is an astonishing fact. The intellectual property, the patents, for this phenomenal rejuvenative technology is already applied for or awarded.

The IP structure of regenerative medicine is unlike most other pharmaceutical or biotech industries, including cellular engineering. Traditional drug discovery, in fact, consists largely of identifying which of many molecules can do a certain thing. Frequently, only a small percentage of possible candidates are identified and then, through an elimination process, one is identified for testing and approval.

Cellular engineering is more dramatic but the potential number of new biofuel-producing algae is theoretically unlimited. Anyone who creates a new breed of algae can patent only that microorganism.

This is not the case with stem cells. There are very few "pluripotent" stem cell types that can become all the other cells. Already, the means of producing these cells and, in many cases, the cells themselves have been patented or applied for.

To invest in algae biofuels, which I probably will do, I will have to pick the most likely winners from a field of players to guarantee owning the big transformational winners. This is possible but it is much riskier than the stem cell space. This is because the number of companies that hold the bulk of the really valuable IP and patent applications can be counted on one hand. If big pharma wants into the regenerative medicine business, and they will, they're going to have to pay these tiny small caps for the right. This reduces the risk of buying losers enormously.

RNA Interference

There are many standalone breakthroughs in biotech and I'll mention a few in a bit. First, I want to tell you about the other big biotechnology industry, RNA interference. RNAi is a perfect fit with regenerative medicine, which has the power to restore damaged and aged tissues but does not attack the causes of diseases. This is where RNA interference fits in.

This field is actually younger even than stem cell sciences. The scientific paper that broke open the field was published in 1998 and the Nobel Prize for medicine was awarded to its authors in just four years ago in 2006. RNAi had one major advantage over regenerative medicine, however. It was not effected by the political and moral controversies that regenerative medicine faced before it moved past embryonic stem cells. As a result, researchers have had no trouble getting government and private funding.

Here is the overview. Our DNA is, in effect, locked and protected in a cellular clean room without a door. DNA communicates with the rest of the body by sending out messages with orders to turn genes on or off. Those messages are RNA, or ribonucleic acid. Therefore, the right RNA sequence can be introduced to the body to mimic those messages, which are then identified as invaders. The provokes the body to treat certain of its own RNA messages as invaders and destroy them.

This is RNA interference and it provides the ability to control any of the genes in our body and the proteins they produce. Those proteins, in turn, are the key to most human diseases. RNAi can both increase and decrease these proteins, providing cures for innumerable diseases. The companies that own those therapies will, in turn, become new pharm giants or they will be acquired by existing pharma.

RNAi researchers are working on drugs that could reduce production of bad cholesterol or increase production of the good form. RNAi could be used to turn off the gene that allows cancers to develop capillary networks. Similarly, it has been demonstrated to turn off the gene that provokes the excess blood delivery that causes wet macular degeneration. It could moderate the ability of the body to store fat or increase muscle mass. In could turn off hypertension or insulin resistance as well as neoplasias such as tumors, infections, and neurodegenerative disorders like Parkinson's and Alzheimer's Disease.

For the first time, science is looking not to treat symptoms, but to actually stop the gene functions that cause diseases. This is truly a revolution. The challenge to this remarkably young science now is the actual delivery of RNAi drugs to cells. We know they work in the lab but RNA molecules are large and fragile, so they don't penetrate cellular membranes under normal circumstances. Additionally, the body tends to clear itself of RNAi drugs through the kidneys or inside the cell itself. Nuclease, which exists inside the cell, also breaks down RNA.

For this reason, a number of delivery mechanisms are being developed to safely transport the RNA as a payload. A handful of small companies with superb talent and IP are racing to perfect their own varying solutions. Each has a different approach to solving the delivery problem but all have demonstrated efficacy. At this point, we don't know which will yield the big solutions. It appears increasingly likely, however, that different platforms will be best suited for different RNAi applications. Each has huge profit potential. RNAi drugs are in trials and big pharm has already snapped up one small cap player.

The Nanotech/IT/Biotech Convergence

I've already mentioned cellular engineering. Craig Venter calls cells hardware and DNA software. He treats DNA like the ones and zeroes in current software. The same IT/biotech convergence is also evident in new in silico experimentation.

Nanotechnologies are contributing indirectly to the explosion in biotech innovation indirectly through new lithographic chip fabrication techniques that increase computer speed and power. The decoding of the stem cell potentiation process relies on this power and would have been impossible only ten years ago. Nanotechnologies are also directly impacting a whole range of biotech applications by allowing increasingly smaller interventions.

I read very recently an editorial in the Wall Street Journal by a writer and research at Ethics and Public Policy Center. In it, he basically declares Richard Feynman's original vision of nanotechnologies a bust. He obviously isn't reading my newsletter because we are currently seeing animal tests of new medicines that combing nanotech polymer structures with biological parts in ways that trick and attack viruses. Already on the market are nanotech sensing systems using submicrosopic biological components married to metal molecules that provide nearly instantaneous diagnoses of a rapidly expanding range of pathogens.

These sensors are going to power an even larger revolution in personalized medicine. For those unfamiliar with the concept, allow me to explain.

Currently, medicine is, to a large degree, a "one size fits all" proposition. Doctors watch for adverse effects and check personal and family histories. Medical technologies, however, are designed for the general population, not individuals.

That's going to change.
We know that many current treatments work on some people, yet not others. Some drugs are safe for many people, but have dangerous side effects for others. Some are just the opposite. This is because all of us have individual differences in our genetic code based on heredity and environment. Even slight differences can lead to very different reactions to medications.
This has created serious regulatory problems. Drugs are denied regulatory approval not because they do not work, but because some fraction of the population suffers adverse effects. As a result, patients are often denied incredibly effective therapies simply because they are not universally effective.

This shockingly primitive state of affairs exists because, until very lately, we simply have not had the tools to get to the genetic roots of disease. Scientists and pharmaceutical companies haven't precisely known how a particular drug's chemical profile interacts with a genetic one. Medical science, in turn, has been unable to tailor drugs to work with a specific genetic makeup. That is rapidly changing.

The Impact of the Genome

With the mapping of the genome, scientists can now identify single genes and their individual expressions. Nanotech biosensors can identify genetic characteristics in individuals so that individual reactions to drugs can be known before they are taken. It is meaningful, from the investor's perspective, that Dr. Francis Collins, the head of the Human Genome Project, now heads the National Institutes of Health. Collins has long been a prominent champion for using the knowledge gained from human genome to accelerate personalized medicine.

Collins has also stated that genomics is currently where the computer industry was back in the 1970s - at the beginning of a technological revolution. While he was speaking in scientific terms, we should remember that the '70s was also the right time to begin investing in a diversified portfolio of breakthrough computer technologies.

I believe this is true across the board for a range of revolutionary biotechnologies. I also like to remind readers that important innovations traditionally do not slow down during economic turn downs. The Great Depression, in fact, is considered by many to be one of the most important periods in the history of innovation.

What I'm hearing now, talking to people who range from Nobel Prize winners to CEOs of biotech start-ups and small caps, is that the world is going to change very soon in ways that no one is prepared for. Our lives are going to be significantly better and longer.

I also like to point out that private investors will not only profit from this revolution, they will power it. This is especially meaningful because one of the most dramatic impacts of these new technologies is longer life spans. By investing in regenerative medicine and other important biotechnologies, you are helping extend your own life. Traditionally, financial analysts have always told us that we should invest more conservatively as we age, with less of our portfolio in speculative higher-risk stocks.

For the first time in history, I believe this is exactly the wrong advice. You don't know how long you are going to live and, with these new therapies, it could be much longer than you've been led to believe. By investing as a younger person, you might actually make it so.

One last thing, here is the link regarding vitamin D that I promised.
http://www.vitamindhealth.org/

Some Thoughts from John Mauldin

The Great Experiment

So this is the backdrop as we look into the future. Unemployment is rising and is likely to remain stubbornly high (over 10%) for some time, except for the few months this coming summer when the Labor Department will hire hundreds of thousands of temporary census workers. The savings rate is rising, and consumer spending is at the very least challenged. The stimulus starts to drop sharply in the latter half of the year.

States, counties, and cities are short about $260 billion and will either have to cut services (and thus jobs) or increase taxes. Housing is likely to get weaker, as there are large numbers of defaults coming because of mortgage-rate resets this year and next (more on that in a few weeks). Valuations on stocks are in the high range, and do not portend well for long-term returns.

Further - and this is the most important item to me - Congress is likely to allow the Bush tax cuts to expire and to add insult to injury with some form of large tax increase for heath care. Between the local, state, and federal tax increases, we could see a massive increase in taxes of perhaps $500 billion in a $13-trillion economy, or about 4% of GDP.Think about that for a moment. It is likely we will begin 2011 with close to 10% unemployment, if not higher.

Christina Romer's work shows that tax cuts have a three-times benefit to GDP. Tax increases presumably have a similar negative effect. (Ms. Romer, by the way, is President Obama's Chairwoman of the Council of Economic Advisors. This is not a partisan idea.)

This is the great experiment to which we are going to be subjected. There are those who agree with Art Laffer and company that tax cuts are a positive for the economy (that would include your humble analyst). And there are those who contend that the economy did just fine in the Clinton years before the Bush tax cuts and that we will do just as well if we take them away. And further, taxing the rich a little more is not really going to change their behavior.

My contention is that if such a tax increase is enacted all at once, the economy will at a minimum dip back into a nasty recession. If I am wrong, then I will have to abandon one of my long-cherished beliefs. I will have to stop arguing that tax cuts are as important as I think. Right now, when I read the data and studies, they confirm my tax-cutting bias. But I have to be willing to change my mind if The Great Experiment proves me wrong.

But if you think unemployment is high now, you will really not like what happens if we dip back into recession. It could go a lot higher. They are truly risking a great deal if they decide to pursue this experiment.

Whither the Fed?

The futures market is pricing in rate hikes from the Fed beginning this fall. I highly doubt a politicized Fed will hike rates with unemployment over 10%, ahead of a November election. We are going to have a very easy monetary policy for longer than most observers think.

The Fed has painted itself into a very tough corner. Raising rates in a high-unemployment environment is risky. Bernanke knows what happened in 1937 and does not want a repeat. But by keeping rates too low for too long, they risk an asset bubble or two. And the federal fiscal deficit of over $1.5 trillion is not making their situation any easier. The Fed has announced it is ending many of their various and sundry programs in the first quarter. They have essentially been the mortgage market.

What will happen to rates? I think that is one of the reasons why Geithner has essentially lifted any limit on explicit guarantees for Fannie and Freddie. It will be seen as higher-paying government debt. It will also cost you, Mr. and Ms. Taxpayer, hundreds of billions in increased deficits, as they are telling those entities to eat the losses from large numbers of loan modifications. This is outrageous on so many levels. Congress should at least have to approve this.

Let me end by saying that, as we face the next crisis - and we will (there is always another crisis) - we will find we have not fixed the causes of the last one. We still have banks too big to fail, we have not put the credit default swaps on an exchange, we have not reinstated Glass-Steagall, Barney Frank's bill (which was not the one that came out of committee) now makes it exceedingly more difficult to short stocks, we keep in power the same people who missed the problems the last time, and the list of bad policies bought (typo intended) to you by bank lobbyists grows ever longer. If the current bill looks like it was written by the bank lobby, that's because it was. But it means we will have to face the same problems all over again.

Another Reason Why the United States is the Greatest Nation on Earth

I find it sad that lately there has been a lot of press regarding “The decline of the US Superpower.” No one has come straight out and said it, but there is that general feeling when reading or listening to the news. Personally, I think that part of that feeling comes from a 2 year long political campaign in which both candidates and their respective parties trashed on what the U.S. was doing domestically and internationally. Unfortunately the President still is trying to push an agenda that would have us believe that he is fixing the tainted image of the U.S. worldwide and how he is working hard to bring the U.S. back to greatness.

I would like to do my part in setting the record straight.

Obviously there are so many ways in which the U.S. is the greatest country in the world that it is shocking there is even a perception that it might not be. I won’t delve into all of those ways (i.e., the freedoms we enjoy, the spirit of capitalism, the envy of other nations, etc.), but I would like to point out one that I had, to my embarrassment, not thought of before. This note is brought from the folks at STRATFOR written back in June of 2009.

The United States and the Free Market

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land – and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.

Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio, and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands and a few miles off the shores of Texas and the East Coast form a water-based highway – an Intracoastal Waterway – that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

The beauty is that the two overlap with near perfect symmetry. The Intracoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops – and not just the ability to easily and cheaply move the crops to local, regional and global markets – but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies. [Think of our massive road networks. Russia didn’t even have a intercontinental highway until this century, and even that is only two lanes for much of the way]

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy – transport capability – geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free – and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and –rail networks anyway, resulting in even greater economic advantages over competitors.)

Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network – The Great Lakes – St. Lawrence Seaway – is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.

Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are not useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico is completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).

With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is not more than a fence in most locations – a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.

Like the transport network, this also helps the U.S. focus its resources on other things.

Taken together, the integrated transport network, large tracts of usable land and lack of a need for standing military have one critical implication: The U.S. government tends to take a hands-off approach [relative to other countries] to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States – and especially its government – comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.

Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States, the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.

Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.

They go on to talk about China and Russia more in depth in their article. Regardless of what you hear about the U.S. in the media, we are still the greatest nation in the world. We still have major advantages over every other country. I think that the above article highlights nicely the major reasons why this land is a choice and promised land. As long as we keep our freedoms the United States can’t help it but be the greatest nation on earth.

Dave Barry

This was too funny from Dave Barry's 2009 Recap article. I clipped out some of the parts to keep it small (ish).

In short, it was a year that we will be happy to put behind us. But before we do, let's swallow our anti-nausea medication and take one last look back, starting with ...

January
... during which history is made in Washington, where a crowd estimated by the Congressional Estimating Office at 217 billion people gathers to watch Barack Obama be inaugurated as the first American president ever to come after George W. Bush. There is a minor glitch in the ceremony when Chief Justice John G. Roberts Jr., attempting to administer the oath of office, becomes confused and instead reads the side-effect warnings for his decongestant pills, causing the new president to swear that he will consult his physician if he experiences a sudden loss of sensation in his feet. President Obama then delivers an upbeat inaugural address, ushering in a new era of cooperation, civility and bipartisanship in a galaxy far, far away. Here on Earth, everything stays pretty much the same.

The No. 1 item on the agenda is fixing the economy, so the new administration immediately sets about the daunting task of trying to nominate somebody -- anybody – to a high-level government post who actually remembered to pay his or her taxes. Among those who forgot this pesky chore is Obama's nominee for Treasury secretary, Timothy F. Geithner, who sheepishly admits that he failed to pay $35,000 in federal self-employment taxes. He says that the error was a result of his using TurboTax, which he also blames for his involvement in an eight-state spree of bank robberies. He is confirmed after the Obama administration explains that it inherited the U.S. Tax Code from the Bush Administration.

February
... that Congress passes, without reading it and without actually finishing writing it, a stimulus package totaling $787 billion. The money is immediately turned over to American taxpayers so they can use it to stimulate the economy.

No! What a crazy idea THAT would be! The money is to be doled out over the next decade or so by members of Congress on projects deemed vital by members of Congress, such as constructing buildings that will be named after members of Congress. This will stimulate the economy by creating millions of jobs, according to estimates provided by the Congressional Estimating Office's Magical Estimating 8-Ball.

Despite this heroic effort, the economy continues to stumble. General Motors, which has sold only one car in the past year -- a Buick LaCrosse mistakenly purchased by an 87- year-old man who thought he was buying a power scooter -- announces a new four-part business plan, consisting of (1) dealership closings; (2) factory shutdowns; (3) worker layoffs; and (4) traveling backward through time to 1955. The stock market hits its lowest level since 1997; this is hailed as a great investment opportunity by all the financial wizards who failed to let us know last year that the market was going to tank. California goes bankrupt and is forced to raise $800 million by pawning Angelina Jolie.

The Obama administration's confirmation woes continue as Thomas A. Daschle is forced to withdraw as nominee for secretary of Health and Human Services following the disclosure that he, too, failed to pay all of his federal taxes. He blames this oversight on the fact that his tax returns were prepared by Treasury Secretary Geithner.

March
... an angry nation learns that the giant insurance company AIG, which received $170 billion in taxpayer bailouts and posted a $61 billion loss, is paying executive bonuses totaling hundreds of millions of dollars. This news shocks and outrages Obama and members of Congress, who happen to be the very people who passed the legislation that authorized both the bailouts and the bonuses, but of course they did that during a crisis and thus had no time to find out what the hell they were voting for. To correct this situation, some congresspersons propose a 90 percent tax on the bonuses, followed by beheadings, followed by the passage of tough new financial legislation that nobody in Congress will read or understand.

In other economic news, the chief executive of GM resigns under pressure from the White House, which notes that it inherited the automobile crisis from the Bush Administration. GM is now essentially a subsidiary of the federal government, which promises to use its legendary business and marketing savvy to get the crippled auto giant back on its feet, starting with an exciting new lineup of cars such as the Chevrolet Consensus, a "green" car featuring a compressed-soybean chassis, the world's first engine powered entirely by dew, and a 14,500-page owner's manual, accompanied by nearly 6,000 pages of amendments.

Businessman Bernard Madoff pleads guilty to bilking investors out of $65 billion in a Ponzi scheme, forcing the Obama administration to withdraw his nomination for secretary of commerce.

The annual observance of Earth Hour is observed with one hour of symbolic energy conservation as hundreds of millions of nonessential lights and appliances are turned off. And that's just in Al Gore's house.

April
... as leaders of the world's powers, looking for a way out of the worsening world
economic crisis, gather in London for the G-20 summit, which ends abruptly in a violent argument over the bill for the welcoming dinner. A short while later, in what many economists see as a troubling development, the International Monetary Fund moves into a refrigerator carton.

In other international bad news, North Korea launches a test missile that experts say is capable of hitting Hawaii, based on the fact that it actually hits Hawaii. The United States swiftly pledges to issue a strongly worded condemnation containing "even stronger words than last time."

On the domestic front, the struggling Chrysler Corp. declares bankruptcy, but its chief executive confidently predicts that the company will come back "bigger, better and stronger than ever," thanks to its 2010 product line, spearheaded by the all-new Dodge Despair.

The big health story in April is the rapid spread of swine flu, a dangerous new virus strain developed by the makers of Purell. Public anxiety over the flu increases when Vice President Biden, demonstrating his gift for emitting statements, declares on the "Today" show that he would not recommend traveling by commercial airplane or subway. A short while later, White House spokesman Robert Gibbs assures reporters that he is "not aware of any 'Vice President Biden.'" In another embarrassment for the White House, New York is temporarily thrown into a panic when Air Force One flies low over Manhattan for a publicity photo shoot. Responding to widespread criticism, Gibbs notes that Obama inherited Air Force One from the Bush administration.

May
... the finale of "American Idol" produces a shocking outcome that sends shock waves of shock reverberating around the planet when the winner turns out to be -- incredibly – that guy singer, what'shisname, despite the fact that the overwhelming favorite was that OTHER guy singer. Congress vows to hold hearings after reports surface that, of the nearly 100 million votes, 73 million were phoned in by ACORN.

But the big political drama takes place in Washington, where Justice David Souter announces that he is retiring from the U.S. Supreme Court because he is tired of getting noogies from Chief Justice Roberts. To replace Souter, Obama nominates Sonia Sotomayor, setting off the traditional Washington performance of Konfirmation Kabuki, in which the Democrats portray the nominee as basically a cross between Abraham Lincoln and the Virgin Mary, and the Republicans portray her more as Ursula the Sea Witch with a law degree. Sotomayor will eventually be confirmed but only after undergoing the traditional Senate Judiciary Committee hazing ritual, during which she must talk for four straight days without expressing an opinion.

In crippled U.S. auto giant news, General Motors announces a new business plan under which it will fire everybody but Howie Long, who will continue to make what GM calls "some of the most popular commercials on the market." Meanwhile, Chrysler, looking to the future, invests $114 million in an Amway distributorship.

On the international-tension front, a meeting of the U.N. Security Council to discuss possible sanctions against North Korea is forced to adjourn hastily when the council chamber is penetrated by a missile.

July
... when Sarah Palin unexpectedly announces that she will not complete her term as elected governor of Alaska, explaining, in a prepared statement, that she has a hair appointment. Asked by reporters if she plans to seek the Republican presidential nomination, she replies, "You leave my personal life out of this."

Elsewhere in state politics, the FBI arrests pretty much every elected official in New Jersey on suspicion of being New Jersey elected officials. On Independence Day, the nation takes a welcome break from its worries to celebrate in traditional fashion with barbecues, parades and -- as night falls -- spectacular aerial North Korean missile detonations.

In government news, top Washington thinkers, looking for a way to goose the economy along, come up with the "Cash for Clunkers" program, under which the federal government provides a financial inducement for people to take functional cars, which are mostly American-made, to car dealers, who deliberately destroy these cars and sell the people new replacement cars, which are mostly foreign-made. This program, which was budgeted for $1 billion, ends up costing $3 billion and is halted after a month. The administration declares that it has been a huge success, which everybody understands to mean that it will never, ever be repeated. With this mission accomplished, the top Washington thinkers are free to train all of their brainpower on the nation's health-care system.

August
... Obama, in the first serious test of his presidency, announces that he will send U.S. troops to rescue Democratic members of Congress pinned down in town hall meetings by constituents firing hostile questions concerning the administration's health-care plan, which turns out not to be wildly popular outside of the immediate Capitol Hill area. The president dismisses concerns that his health-care agenda is in trouble, observing, "There's something about August going into September where everybody in Washington gets all wee-weed up." White House spokesperson Gibbs explains that the "vast majority" of the wee-wee was inherited from the Bush administration.

California, in a move apparently intended to evade creditors, has its name legally changed to South Oregon.

In an alarming technological development, hackers shut down Twitter, leaving a desperate and suddenly vulnerable America with no way to find out what the Kardashian sisters are having for lunch. The Federal Emergency Management Agency urges the nation to "remain calm" and "use Facebook if you can." Twitter service is eventually restored, but most of the estimated 875 million thoughts that went untweeted during the outage will never be recovered, making it the nation's worst social-networking disaster ever.

September
... Obama, speaking on health care before a joint session of Congress, is rudely
interrupted by Kanye West, who grabs the microphone and declares that Beyoncé has a better health-care plan. No, wait, sorry: The president is rudely interrupted by Republican congressman Joe Wilson, who shouts, "You lie!" Wilson later apologizes for his breach of congressional etiquette, saying, "I should have just mooned him."

With public support for the administration's health-care plan continuing to slip, the
president orders U.S. troops into Fox News, then goes on a media blitz, appearing, in a three-day span, on "Meet the Press," "Face the Nation," "Meet the Nation," "Face the Press," "Press Your Face Against the Nation," Letterman, Leno, Judge Judy, Iron Chef and "Dog the Bounty Hunter."

The president also delivers a back-to-school speech to the nation's students, telling them to work hard and get a good education. Fortunately, thanks to the vigilance of the talk-radio community, many parents realize that this is some kind of secret socialist code message and are able to prevent their children from being exposed to it.

On the international-finance front, leaders of the world's economic powers gather for the G-20 summit meeting in Pittsburgh, where, in a rare display of unity, they vote unanimously to fire whomever is responsible for selecting their meeting sites.


October
…On a happier note for the White House, President Obama wins the Nobel Peace Prize, narrowly edging out Beyoncé.

In the Middle East, hopes for peace soar when Iran announces that it will allow U.N. inspectors to visit its nuclear-enrichment facility. Hopes plunge soon after when the inspectors report that they were taken to what appears to be a hastily abandoned kebab stand with a hand-painted sign that says "NUCLEAR ENRICHMENT," as well as what the inspectors describe as "numerous health-code violations."

November
... a Washington couple, Tareq and Michaele Salahi, penetrate heavy security and enter the White House, a feat that Joe Biden has yet to manage. As details of the incident emerge, an embarrassed Secret Service is forced to admit that not only did the couple crash a state dinner, but they also met and shook hands with the president, and they "may have served briefly in the Cabinet."

In other White House news, the president, in a much-debated post-Thanksgiving decision, announces that he is sending U.S. troops into the electronics departments of 1,400 Best Buy stores to prevent Black Friday shoppers from killing one another over flat-screen TVs. Hours later, the president withdraws the troops, calling the situation "hopeless." Press Secretary Gibbs notes that the president inherited Black Friday from the Bush administration. Attorney General Eric H. Holder Jr. announces that, to maintain the principle of due legal process, alleged Sept. 11 mastermind Khalid Sheikh Mohammed will be tried in federal court in New York City, but as a precaution, "he will be executed first."

December
... Obama, after weeks of pondering what to do about the pesky war situation he inherited, announces a decision -- widely viewed as a compromise -- in which he will send 30,000 additional troops to Afghanistan but will name their mission "Operation Gentle Butterfly."

On the economic front, the nation's unemployment rate remains stubbornly high as it becomes clear that the $787 billion stimulus package has created a total of only eight jobs, all in the field of highway-construction flagperson. Looking for solutions, the president hosts a White House "jobs summit" attended by political, business and labor leaders, as well as 23 Portuguese tourists who got lost while trying to visit the Washington Monument and somehow penetrated White House security. Meanwhile, in what is believed to be the largest Craigslist transaction ever, California sells San Diego to Mexico.

On the environmental front, Copenhagen hosts a massive international conference aimed at halting manmade global warming, attended by thousands of delegates who flew to Denmark on magical carbon-free unicorns.

In the Middle East, U.N. nuclear inspectors become suspicious when Iran attempts to ship to Israel, via UPS, a large crate labeled "HARMLESS ITEMS -- DELIVER BEFORE TIMER REACHES 00:00."